Alaska Governor Sean Parnell is pushing to transfer $3 billion out of the state’s rainy day fund and into its pension funds, which rank among the unhealthiest in the country. The plan, released today as part of Parnell’s 2015 budget, aims to pay down a portion of the unfunded liabilities which plague the state’s retirement system.
Pensions & Investments reports:
Under the governor’s proposal, $1.88 billion would go to the $14.3 billion Alaska Public Employees’ Retirement System and $1.12 billion to the $6 billion Alaska Teachers’ Retirement System. Both pension funds are administered by the Alaska Retirement Management Board, Juneau. The contributions would increase the funded status of the plans by 10 percentage points each to 73% and 63%, respectively. It also would lower the overall unfunded liability to $8.9 billion.
If the Legislature approves the injection of assets, future contributions through 2035 would be $500 million per year, reducing annual payments by an average of about $400 million per year through fiscal year 2030.
The plan is radical, but the state’s retirement system is in dire straits: Alaska’s pension funds are only 59.2% funded, according to a MorningStar report. The same report found that Alaska has racked up $10,325 in unfunded liabilities for every person living in the state, a liability per capita ratio that ranks as the worst among all 50 states.
Illinois’ pension crisis has been decades in the making, but lawmakers for years seemed content to push the politically sensitive issue further down the road. While other states were grappling with solutions, Illinois was shorting its payments to the state’s five pension systems—or skipping them altogether.
Those decisions proved costly, as the state’s credit rating was repeatedly downgraded and now sits as the worst in the country. In the meantime, annual pension payments ballooned to $6 billion in 2013, representing 20% of the general fund’s budget and siphoning money from education and social services.
Then, late last month, after months of meetings, closed-door negotiations and special sessions, lawmakers emerged with a proposed solution: Senate Bill 1, a sweeping pension reform law which aims to save the state $30 billion over the next 30 years and fully fund its pension system by 2044.
Illinois Governor Pat Quinn signed the bill into law during a private ceremony Thursday.
The specifics of the law, according to The Associated Press:
Under the new law, automatic, annually compounded 3 percent cost-of-living increases for retirees — considered to be the biggest driver of pension costs — would be replaced with smaller annual adjustments for the highest earners. Some workers would have the option of freezing their pension and starting a 401(k)-style defined contribution plan. Also, the retirement age will be pushed back for those 45 and younger.
Additionally, the law requires that Illinois make its full annual contributions, and allows the state’s retirement systems to sue if the payments aren’t made.
“Illinois is moving forward,” Quinn said after signing the bill. “This is a serious solution to address the most dire fiscal challenge of our time.”
When a federal judge ruled today that Detroit could legally cut pensions as part of its bankruptcy proceedings, it was akin to putting a bullseye on the back of pension funds that had previously been heavily protected by constitutional and contract law.
It didn’t take long for the nation’s largest public pension fund to weigh in on the matter: California’s Public Employee Retirement System (CalPERS) has taken the unmistakably forceful stance that the Detroit ruling is not only misguided, but that it doesn’t affect their system at all.
From a CalPERS statement released just hours after the ruling:
“The Detroit court failed to recognize the difference between a two party contract and the unique nature of a state public employee retirement system…In California, our members’ vested rights to their pensions are protected by the California constitution, statutes and case law.”
The statement goes on to state why CalPERS is confident the ruling doesn’t apply to its system:
“Unlike Detroit, CalPERS is not a city pension plan. CalPERS is an arm of the state and was formed to carry out the state’s policy regarding public employees. The Bankruptcy Code is clear that a federal bankruptcy court may not interfere in the relationship between a state and its municipalities. The ruling in Detroit is not applicable to state public employee pension systems like CalPERS.”
Although Michigan’s ruling isn’t legally binding in California, the judge’s decision sets the precedent that cities in bankruptcy proceedings can “impair” pensions just as they can traditional contracts, constitutional provisions not withstanding.
In a pension shot heard ‘round the world, a ruling has come down in Detroit’s bankruptcy case that will have implications far beyond the city’s limits: in a surprise decision, U.S. Bankruptcy Judge Steven Rhodes has ruled that pensions can legally be cut during the city’s bankruptcy process.
Kevyn Orr, Detroit’s emergency manager, has said in the past that significant pension cuts for both current and retired workers will be necessary to dig the city out of its financial hole. But pensions are heavily protected in Michigan, thanks to a provision in the state constitution that categorizes public pensions as “contractual obligations” which are protected from being “diminished or impaired” under any circumstances.
But now that’s changed.
“Pension benefits are a contractual obligation of a municipality and not entitled to any heightened protection in bankruptcy,” Rhodes said in his ruling.
Detroit is facing the financially toxic reality of having twice as many pensioners as active employees. It remains to be seen whether (and to what extent) the city will move forward with the cuts, which are sure to be politically painful. But now, for the first time, the city has the legal go-ahead to do so.